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Monday, November 04, 2013

What Me Worry? - American Legacy Foundation Executives' Relaxed Response to a $3 Million Plus Fraud

A Washington Post investigation into diversion of money from US not-for-profit organizations provided a striking case study showing the apparently relaxed approach taken by managers to apparent wrongdoing by one of their own.

Background: the American Legacy Foundation

The Post noted that

The American Legacy Foundation is a revealing case study. While
some challenges it faced were uncommon, fraud examiners said many
resemble those they see time and again.
Legacy was founded as a nonprofit organization in 1999 out of the
Master Settlement Agreement that resolved health claims brought against
cigarette companies on behalf of the public by authorities in 46 states
and the District.

With $50 million in annual expenditures and $1 billion in assets,
Legacy is perhaps best known for its edgy anti-tobacco advertising
campaign known as 'Truth.'

The Foundation's governance is provided by some top government leaders, including leaders of law enforcement.

Deen Sanwoola, ... a charismatic computer specialist
who was Legacy’s sixth hire. He was tasked with building the
organization’s information technology department.

No one realized, during Legacy’s frenetic early days, that the
department had been formed without adequate financial controls, Legacy
officials said. Or that Sanwoola had been placed in charge of both
ordering electronic equipment and logging it as having been received — a
mix of responsibilities that an outside auditor later described as a
classic error that placed Legacy at risk.

So,

After Sanwoola’s arrival in October 1999, Legacy’s IT department
began spending freely on computers, monitors and software, much of it
purchased from a single company in suburban Maryland, [Legacy President and CEO Cheryl] Healton said.

Thanks to the court settlement, Legacy enjoyed a tremendous flow of
cash, with revenue exceeding $320 million.
The first questionable purchase came in December 1999, according
to a forensic audit conducted years later. 'The fraudulent billing
started almost immediately on his arrival,' said [Idaho Attorney General Lawrence] Wasden, the board
chairman.

In that first transaction, the foundation paid more than $18,000
for a computer processor and related equipment that auditors concluded
should have retailed for less than $7,000.

Data, documents and a summary of findings that Wasden provided to
The Post show that questionable purchases of printers, software and
servers steadily increased in size and frequency, peaking with 49
charges in 2006. In some instances, Legacy appeared to have paid many
times an item’s worth, auditors said. In others, auditors said Legacy
paid an inflated price for 'phantom purchases' of equipment that
apparently never arrived.

Over years, Sanwoola is thought to have generated as many as 255
invoices for computer equipment sold to the foundation, Legacy officials
said; 75 percent of them later were deemed by the foundation to have
been fraudulent.

A Relaxed Response

Sanwoola left AFC in 2007,

In early 2007, Sanwoola, by then an assistant vice president with a
$180,000 compensation package, announced he was leaving. It jolted
[AFC President and CEO Cheryl] Healton, who said she 'begged' him to stay. [ALC CFO Anthony T[ O’Toole recalled Sanwoola
saying that his wife wanted to raise their children in Nigeria and that
the move would allow him to help his ailing mother.

But then,

six months later, when an executive at Legacy approached
O’Toole and told him he was unable to locate computer equipment listed
in the inventory. O’Toole said he waved away the complaint without
bothering to investigate.

'He just pooh-poohed it,' Healton said of O’Toole, who received
current and deferred compensation totaling $568,000 in fiscal 2012.

Three years later, the same employee — Legacy officials describe
him as a whistleblower — again raised an alarm. This time, he bypassed
O’Toole and took his concerns to a staffer close to Healton.

The response this time was different. Within days, Legacy hired
forensic examiners to investigate and Healton notified the board.

One of the outside auditors’ first reactions, Healton recalled,
was, 'There’s no way an organization like yours could spend this much on
IT.'

Auditors interviewed employees, reviewed invoices and recovered
deleted files from a backup computer server in Chicago. Auditors found a
template for invoices from the outside supply company, Legacy officials
said, as well as computer code that showed the template had been
designed and generated by someone using Sanwoola’s log-in.

Officials concluded that of $4.5 million in checks and credit
card charges associated with the Maryland IT supply company,
$3.4 million had been fraudulent.

In late 2010 or early 2011,

foundation executives asked Miller, the Iowa
attorney general on Legacy’s board, to call the office of the U.S.
attorney.

However, despite the fact that it was ALC money that had been lost, ACL managers thereafter seemed to take little interest in the case,

Legacy officials said they had made no attempt to contact Sanwoola,
based on a request from federal prosecutors. In a statement for this
article, the U.S. Attorney’s Office responded that they had made no such
request.

They also were in no hurry to disclose the foundation's loss,

Word that millions of dollars were thought to be missing remained
largely within Legacy until it came time in 2011 to file its annual
disclosure, a public document signed under penalty of perjury.

The disclosure
said that the 'fraud' of more than $250,000 did not 'meet other
materiality tests for financial reporting' and that the organization had
told its board and law enforcement. It also said Legacy had filed an
insurance claim that had been 'successfully settled.' The document did
not reveal that the settlement fell far short of the loss.

When first approached by The Post, Legacy general counsel Ellen Vargyas
said the organization had no obligation to identify the full estimate
of the loss and stressed that more information was in the foundation’s
2012 filing. That filing included a reference to $1.3 million in
miscellaneous revenue from an insurance settlement, without saying what
it was for.

'I do think it was a full and appropriate disclosure,' Vargyas said.

Legal specialists consulted by The Post disagreed. 'Those
suffering a diversion are obligated to report the dollar amount,' said Gary R. Snyder, a charity consultant who tracks fraud.

Federal filing instructions direct nonprofits to 'explain the nature of the diversion, amounts or property involved . . .
and pertinent circumstances.' Charity specialists said there is no
established penalty for a nonprofit that fails to follow the
instructions.

A day after declining to disclose the amount to The Post, Vargyas
reconsidered. 'Our best estimate of the full loss comes to this:
$3,391,648,' she wrote in an e-mail. She said her initial reluctance to
disclose an amount was because Legacy’s number was based on estimates
that had 'never been tested in a court of law.

Wasden added that the absence of a total dollar figure in its
public filing was the foundation’s way of being restrained in describing
its loss, in deference to the then-continuing federal investigation.
The U.S. Attorney’s Office stressed, however, that it did not suggest
that Legacy play down the size of the loss in its disclosure.

Legacy officials said they were told in March, for the first
time, that there would be no charges. The U.S. Attorney’s Office
disputed that, saying the FBI informed Legacy in February 2012 that the
investigation had been closed because, despite warnings, Legacy had
taken more than three years to report the missing computers and lacked
reliable records of what it owned.

It appears that there will be no further action in this case. The statute of limitations has passed for any further criminal or civil actions, according to the Post. And Mr Sanwoola seems to be comfortably ensconced in Lagos, Nigeria.

Summary

The American Legacy Foundation case showed that a "charismatic" management insider (who finished his career as an assistant vice president with a $180,000 compensation package according to the Post), who had "close personal ties" with the organization's CFO (who "received current and deferred compensation totaling $568,000 in fiscal 2012" according to the Post), was apparently able to embezzle something like $3.4 million dollars, then walk away. Initial whistleblowing was ignored by the CFO (who received compensation of $729,000 in 2012 according to the Post), apparently delaying any action for three years. A second complaint to the CEO provoked a response, but not exactly an urgent one. While law enforcement was notified, there is no evidence that any foundation managers followed up on it, nor did they see fit to disclose much detail about the loss on their watch. As a result, no one seems to have been held responsible, and only some money was recovered, but from insurance.

Now we understand why these managers made the relatively big bucks.

By the way, the Post article included a link to a database of other diversions of money from non-profit organizations, including many prominent health care organizations (e.g., Memorial Sloan-Kettering Cancer Center, Children's Hospital of Pennsylvania, NYU Hospitals Center, Shands Jacksonville Medical Center, Harvard Medical School Faculty Physicians at Beth Israel Deaconess Hospital, and the Society for Academic Emergency Medicine). Whether the circumstances of the diversions they suffered were anything like those affecting the ALC is unknown pending further investigation of their disclosures.

Again, the top executives of a non-profit organization are supposed to put the organization's mission ahead of personal gain. Yet in this case, executives seemed more interested in keeping quiet about an apparent fraud by one of their own than in recovering the money or holding anyone accountable.

This is yet another instance of top leaders in health care seeming to be more loyal to "managers' guild" than their own organizations, their organizations' mission, or patients' and the public's health in general.
A while ago, chief architect of "managed competition," (and former architect of body counts during the Vietnam War, look here) Alain Enthoven admitted, but only to a European audience, that he wanted to end the influence of the "physicians' guild," which he blamed for rising health care costs, and turn health care over to managers (look here). That "managers' coup d'etat" seems to have been accomplished. The result, however, is that health care is now lead by people who seem sworn only to promote their own interests, while hiring public relations and marketing folks to make it appear otherwise.

While many people debate health care reform in terms of the details of health insurance, true health care reform would restore control of health care to people held accountable for putting patients' and the public's health ahead of their personal enrichment.

2 comments:

There was an interesting study I cannot find that showed how over time non-profits change as they loose their original focus and end up lost in a sea of money. The result is a management team with no anchor to the original purpose, and no concept of the money they are responsible for, or are spending.

When you are dealing with such a large financial base a little more for a larger salary is a small thing. Covering up a loss to save face becomes money well spent.

Hospitals no longer deal with patients but are enterprises. Colleges are no longer places of education with students but multi-billion dollar operations. Non-profits often become the home of those who view the world as they want it to be, not as it is, where the money they have been entrusted with is to be spent wisely, not on personal goals.

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